Hawkish central banks amid easing concerns over Evergrande

Market movers today

The heavy central bank week continues today with policy announcements from Norges Bank and the Bank of England. We expect Norges Bank to raise its policy rate by 25bp to 0.25% and say that it will "most likely" hike again in December. Also, developments since June would suggest that the rate path in the new monetary policy report will be slightly steeper than the one in June, and signal a c. 50/50 % probability of 3 or 4 hikes next year.

It is one of the interim Bank of England (BoE) meetings so we do not expect major cfhanges to policy signals. That said, there are increasing speculations that the BoE may turn more hawkish, as inflation is high and payroll employment is now higher than pre-COVID (although total employment is not). We do not expect anything new from the Swiss National Bank.

Besides that preliminary PMIs for the euro area, the UK and the US are due out today. We expect the PMIs to confirm we are beyond the peak in manufacturing but that bottlenecks remain.

US jobless claims are interesting, as the temporarily higher unemployment benefits expired in early September.

Finally, markets will continue to watch the Evergrande situation closely.

The 60 second overview

Evergrande: Concerns over a collapse of Evergrande have eased on tentative signs that an orderly restructuring might take place. Chinese shares have increased around 1% in Hong Kong overnight. We are still waiting for news on the USD83.5m of interest payments on a dollar bond, though. Yesterday, Evergrande announced an agreement had been made with bond holders of domestic bonds on a separate payment due today. Markets also got some support from a report yesterday that Beijing is working on a plan to take over the company and split it into three which also spurred hopes that the crisis might soon find a solution. The report has not been confirmed, though, so it is not clear if there is any truth to this. Our baseline has been that it would get worse before it gets better. But the situation is very fluid and it is also possible that the government judges that it needs to intervene soon to avoid too much damage on an economy that is already struggling with lag of demand drivers after new Covid outbreaks have turned off the consumer engine.

The Fed: Yesterday the Fed announced that tapering "may soon be warranted" and that it expects tapering to be concluded in mid-2022. The 'dot plot' was raised signalling a total of 6.5 rate hikes by year-end 2024.   We expect the Fed to announce tapering at the next meeting in November and that the tapering pace will be approximately USD20bn per month, implying that tapering is concluded by mid-2022. We still expect the first rate hike in H2 2022, either in September or December, see also Fed Research - Review: Fed is about to start a tightening cycle.

Equities: Markets were too busy rebounding, as they shrugged off the FOMC decision. US struggled somewhat to find its direction in the last hour of trading, but judging by the initial reaction Fed's hawkish tilt was well received. Risk on also evident in relative sector performance, with value and cyclicals the name of the game. Energy, banks and tech were among the sector favourites. Meanwhile, healthcare and utilities trailed. S&P500, Dow and Nasdaq all up 1% and Russell 2000 a solid 1.5%. VIX lower for a second day, and now slightly south of 25. Optimism continuing in Asia this morning with markets up in the 1%-range. US futures all in green.

FI: Yesterday, German 10Y yield was marginally lower with semi-core and periphery yields seeing a larger drop in yields as Italy 10Y was 3bp lower. The announcement that Fed tapering may start soon made the US yield curve to flatten slightly as 2-year yields increased while 10-year yields declined.

FX: EUR/USD broke below 1.17 yesterday after the more hawkish-than-anticipated Fed message. EUR/NOK and EUR/SEK ended the day basically unchanged from just before the Fed announcement. Today's key events in FX space are the Norges Bank and Bank of England meetings.

Credit: Credit had a good run yesterday where iTraxx Xover tightened 6bp and Main 1.3bp. HY bonds tightened 1bp while IG widened slightly.

Nordic macro

We expect Norges Bank to raise its policy rate from zero to 0.25% and say that it will "most likely" hike again in December. Also, developments since June would suggest that the rate path in the new monetary policy report will be slightly steeper than the one in June, and signal a c. 50/50 % probability of 3 or 4 hikes next year.